Let's talk about Economics

I put this thread in Conspiracies because I believe there very much is a conspiracy to be found on the world economic stage. However, it's probably going to take some back and forth discussion (here) to distill down the essence of just exactly what this conspiracy is. Economics and money is often the core underpinning of most conspiracies, so I thought it might be interesting to flesh some of this out. I will be very interested to see what other ATS'ers have to say about this subject.

Let's start with some basic economics discussion.

Back before the creation of currency (and we will get to fiat currencies later, so let's not jump there just yet, but instead put together the building blocks of "how" you get there), there was trade. In fact, let's rewind all the way to nearly cave man times. Back during these prehistoric times one group of people would have a commodity or skill that another group of people wanted. Conversely, the second group of people might have another (different) commodity or skill that the first group wanted or needed. These diverse needs quickly brought about the notion of trade. One group of people would trade a good or service with another group who had something they wanted...and vice versa. This is trade based economics at its very most basic level.

Soon though it would become apparent that one group would have a need for goods or services 'before' they had a commensurate good or service to trade themselves. Think about things like agriculture for example; one group might need meat or eggs now, but wouldn't be able to pay back the good or service until their wheat was ready to harvest. This created the notion of debt, one group trading a good / service now in return for payment with a good/service later.

Fast forward hundreds or thousands of trade iterations later, now the simple barter economics becomes too complex to track in an ordinary fashion so there needs to be a common reference point. (Yes, we're moving quickly here, glossing over some steps, but this is just background). This common reference point must be a commodity which is not abundantly available (i.e. rare), and because it's rare it has universal value. This universal value would establish a benchmark from which value could be derived. Now a group can trade for a good or service now by using a 'currency' (a rare item of value) which they had 'earned' selling a good/service in the past. In an equalized economic environment debt now goes away (for a brief moment in time).

Note: In early times there were many such rare and valuable commodities, and rather than go through all of the permutations of each of these different commodities (precious metals, gems, etc.) we'll fast forward (skip) right to gold. (Yes, we skipped quite a few, but it's just for simplification).

Now we have an economy where gold can be used to pay for a good or service. Gold is a currency. Soon though the concept of debt quickly comes back into play. One person or group wants to purchase a good or service for which they don't have enough gold. Here the concept of a middleman shows up, a very crude and early form of "banking". One person/group who does have enough gold to buy desired product agrees to buy said product on behalf of the group who wants it, but to do this they must get something in return. They will "loan" the first group the gold to buy the product they desire provided this same group agrees to pay them back with more gold (more than the purchase amount) at a later date. Now we have the concept of banking with interest.

(Note: I'm going to stop here for a moment while I try to figure out the best way to characterize the transition from individuals loaning money to central depositories loaning money. Please feel free to jump in here if you can help. Where we're ultimately headed with this discussion (I hope) is to illustrate how economics as a whole fails (or succeeds) when a gold backed currency changes to a fiat currency, and "value" changes from a "real" value to a "perceived" value)

This next part is probably a gross over-simplification, but here goes...

Note: I am trying to keep the concepts of things like government and taxation out of this discussion (at least for the moment) because I think it complicates the essence of the economics. For this reason I've intentionally left out churches and rulers like royalty from the discussion. I do realize they are evolving simultaneously.

Soon a person or group with large amounts of currency realizes there is a value in banking as an actual business, but the demand for their currency exceeds even their own currency. One solution to this problem is to leverage their own currency reserves by creating an environment where other people deposit their currencies into a central depository for safe keeping. In return for their deposits they will be paid a small sum (interest of sorts). Now the 'bank' has more currency than the available gold reserves of the founder. The founder (bank) realizes that his depositors are unlikely to all withdraw their money at the same time so he can make even more money by loaning some of the depositor's money to others and collecting interest on the same (this is how he can afford to pay depositors a small sum for their deposits).

Scale this scenario up a few hundred or thousand times and you now have the concept of "banking" (simplified, but at least conceptually intact). Also remember, we're still only talking about actual gold as the currency, no paper currency has entered the picture yet.

Over time the mechanics of trading in actual gold becomes cumbersome, if for no other reason than gold is heavy and hard to transport. Gold is also problematic to sub-divide into very small increments without waste/loss. An alternative to this is to create a piece of paper or token which represents the gold on a 1 for 1 basis. Now rather than trading in the actual gold itself, trade is conducted using a representative of the gold with the understanding that if at any time someone wants to convert their paper currency into actual gold (to cash out) they can.

So now we have the notion of a gold backed currency. (very simplified, yes, I realize)

Trade is now conducted using the paper currency with the understanding that it represents the gold, but the currency has little value itself relative to the gold. (Yes, I skipped a bunch of steps there, but I can't figure out how to characterize it quickly without writing an entire book).

As all of these steps are progressing and evolving, at the same time the total volume of trade in goods and services is also increasing (exponentially). Trade between individuals has now escalated into trade between villages, cities and even countries. (Incidentally, this is the reason I skipped quickly to gold because it is at this point where a more universal benchmark such as gold would need to be established, and why other localized rare commodities would become progressively more problematic due to their varied relative value).

At this point does everyone agree that we have adequately established the basis for a gold backed paper currency, or should I spend more time developing this?

Okay, now we'll go into 'fiat' money/currency (the actual 'conspiracy part)... (this'll be fun...not really...this is going to be tough to characterize easily)

In time the world economy has expanded to the point where the total value of trade exceeds the total value of gold reserves on the planet (at least in theory). Now what? In theory, the world economy is being constrained from further growth/expansion because it exceeds the total value of available gold. So now there are a couple of options; 1.) you could add in a new precious commodity to increase the aggregate value, or 2.) you break the relationship between the paper currency and its gold backing. As it turns out, in the current world economy they've actually done both (options 1 and 2), but we're going to focus on option #2 for this discussion because it is by far the greater of the two, in terms of economic value. And yes, I have way over-simplified the economy.

Now the "value" of our new currency is based on trust or perceived value, no longer real value. A government says the value of a currency is (x), so people have to believe the currency is really worth (x). In theory, the total quantity of currency in circulation should be fixed. Now, in just pure simplified economics and math, if we introduce more currency we have to amortize the value of this new currency (plus the old) across the value of the overall economy at the moment that we added the new currency. In other words, if the value of the economy is $100 and we have (100) chits of currency in circulation then the value of each chit is exactly $1. If we now add (100) more chits to the same economy then at the exact moment we do this the value of each chit is now only worth $0.50 because now (200) chits equals $100 in value (again, simplified, but just as an example).

a reply to: Flyingclaydisk

The value of currency isn't determined by what a government says its value is. Government attempts to say what the value of a currency should be have almost always failed with the exceptions generally being exceptional circumstances such as war time.

In theory you would only want a fixed amount of currency if you are assuming a steady state economy. Something that never exists in reality.

originally posted by: ScepticScot
a reply to: Flyingclaydisk

The value of currency isn't determined by what a government says its value is. Government attempts to say what the value of a currency should be have almost always failed with the exceptions generally being exceptional circumstances such as war time.

Which is actually the essence of this thread. Herein lies the fallacy and conspiracy...governments setting the value of a currency. It's all propaganda, smoke and mirrors.

In theory you would only want a fixed amount of currency if you are assuming a steady state economy. Something that never exists in reality.

Agreed, but it was the best way I could think of in order to simplify the concept enough to establish the basis for discussion. I'm certainly open to suggested edits.

a reply to: Flyingclaydisk

Sorry I may have interrupted too early but I do like a good economics thread . I will come back in when you have devolved the conspiracy part.

a reply to: Flyingclaydisk

In other words, if the value of the economy is $100 and we have (100) chits of currency in circulation then the value of each chit is exactly $1. If we now add (100) more chits to the same economy then at the exact moment we do this the value of each chit is now only worth $0.50 because now (200) chits equals $100 in value (again, simplified, but just as an example).

Are you qualifying/equivocating with "again, simplified, but just as an example" to make a salient point, so as to not to be lost in the minutiae in the wall of text, or are you better suited to understand basic macroeconomics with some help? However simplified, it's entirely wrong.

Pro tip: "more chits to the same economy then at the exact moment we do this the value of each chit is now only worth..." isn't inflation (as your example asserts is) -- it well could be at a certain point and I would wager any time monetary policy assauged economic turmoil with a doubling of the money supply that would, indeed be inflation of the hyper-type -- per se, but a function of the money multiplier effect.

a reply to: ScepticScot

Well, I'm kind of there now actually. Please do jump in and assist if you don't mind.

I guess the part I need to add is, this perceived value is not what people think it is and were it all to blow up tomorrow there is no way it can be unraveled/unwound back to anything coherent. The entropy factor of the situation is high. I honestly don't believe most understand; this isn't just a matter of unscrambling an egg, it is a matter of uncooking a scrambled egg, and then unscrambling it...if just unscrambling it alone wasn't hard enough.

a reply to: Flyingclaydisk

Star and flag for a well thought out, well presented argument. All currency is fiat currency; that is not a conspiracy, it is a social agreement. Even when nominally designated by a government, the actual value of currency fluctuates due to the price of goods and services changing through market forces; supply and demand.

As the world has grown more complex, there have been more and more fiscal and economic innovations. Global trade has made many of them nearly universal. Only highly isolated states like North Korea are not part of this global system. It definitely has its flaws, but its continued failures will hopefully lead to its positive evolution.

a reply to: BeefNoMeat

1. Well, I think I might understand both macro and micro economics just a wee bit better than you may think.

2. Who said anything about 'inflation'? There was no assertion. That was a pure math equation. Think about it like common stock value. 100 shares of stock in a company worth $100 means each share is worth $1. Add 100 shares (for a total of 200 shares) and now each share is worth $0.50.

ETA...keep the stock value at $1 and conversely you now have a company worth $200, right? But is it really "worth" $200? That extra $100 was derived from 'perceived' value, not from 'actual' value.

originally posted by: DJW001
a reply to: Flyingclaydisk

Star and flag for a well thought out, well presented argument. All currency is fiat currency; that is not a conspiracy, it is a social agreement. Even when nominally designated by a government, the actual value of currency fluctuates due to the price of goods and services changing through market forces; supply and demand.

Good point. No, it is not a conspiracy in and of itself. And yes, it does fluctuate based on those things, but there are also other non-intrinsic (political) factors which affect the value also. I just need to better articulate that element.

As the world has grown more complex, there have been more and more fiscal and economic innovations. Global trade has made many of them nearly universal. Only highly isolated states like North Korea are not part of this global system. It definitely has its flaws, but its continued failures will hopefully lead to its positive evolution.

Well, I think we all hope this is the case. Sometimes I'm not so sure it will though.

originally posted by: Flyingclaydisk
a reply to: ScepticScot

Well, I'm kind of there now actually. Please do jump in and assist if you don't mind.

I guess the part I need to add is, this perceived value is not what people think it is and were it all to blow up tomorrow there is no way it can be unraveled/unwound back to anything coherent. The entropy factor of the situation is high. I honestly don't believe most understand; this isn't just a matter of unscrambling an egg, it is a matter of uncooking a scrambled egg, and then unscrambling it...if just unscrambling it alone wasn't hard enough.

I don't think people care if the currency is backed or not and there is no reason they should. What matters is that the currency works as a medium of exchange.

Not having a backed currency makes it easier to deal with financial crises and minimise the effect on the real economy. That's why 2008 was a financial crises not a second great depression.

The majority of money in circulation has never been directly backed by gold or any other commodity anyway as the vast majority of money in circulation is privately created.

If there was a real economic crises (run out of oil, major crop failure or whatever) the having the currency backed by a shiny metal makes no difference.

a reply to: BeefNoMeat

The money multiplier erect is largely a Myth. Money creation by banks is driven by demand for credit, reserves are taken care of after the fact.

originally posted by: ScepticScot

originally posted by: Flyingclaydisk
a reply to: ScepticScot

Well, I'm kind of there now actually. Please do jump in and assist if you don't mind.

I guess the part I need to add is, this perceived value is not what people think it is and were it all to blow up tomorrow there is no way it can be unraveled/unwound back to anything coherent. The entropy factor of the situation is high. I honestly don't believe most understand; this isn't just a matter of unscrambling an egg, it is a matter of uncooking a scrambled egg, and then unscrambling it...if just unscrambling it alone wasn't hard enough.

I don't think people care if the currency is backed or not and there is no reason they should. What matters is that the currency works as a medium of exchange.

I think you are correct, people do not care. About what matters; this is why I went into the background as I did, to illustrate why people don't care (and speaks to how trust is established).

Not having a backed currency makes it easier to deal with financial crises and minimise the effect on the real economy.

Agreed, it makes it much easier (infinitely in fact). And, it is this same ease which complicates the picture (also infinitely).

That's why 2008 was a financial crises not a second great depression.

Well, I for one am not entirely convinced that the 2008 crisis is over yet. I think it has been obfuscated, albeit temporarily, but there is no proverbial free lunch...and the solution to date gave away a whole bunch of free lunches...not to mention let a whole bunch of crooks who were selling lunches but providing nothing off the hook.

The majority of money in circulation has never been directly backed by gold or any other commodity anyway as the vast majority of money in circulation is privately created.

I would disagree, at least in principle.

If there was a real economic crises (run out of oil, major crop failure or whatever) the having the currency backed by a shiny metal makes no difference.

At this point, I would agree, at least temporarily it would make no difference. However, over time it would.

originally posted by: Flyingclaydisk

originally posted by: ScepticScot

originally posted by: Flyingclaydisk
a reply to: ScepticScot

Well, I'm kind of there now actually. Please do jump in and assist if you don't mind.

I guess the part I need to add is, this perceived value is not what people think it is and were it all to blow up tomorrow there is no way it can be unraveled/unwound back to anything coherent. The entropy factor of the situation is high. I honestly don't believe most understand; this isn't just a matter of unscrambling an egg, it is a matter of uncooking a scrambled egg, and then unscrambling it...if just unscrambling it alone wasn't hard enough.

I don't think people care if the currency is backed or not and there is no reason they should. What matters is that the currency works as a medium of exchange.

I think you are correct, people do not care. About what matters; this is why I went into the background as I did, to illustrate why people don't care (and speaks to how trust is established).

Not having a backed currency makes it easier to deal with financial crises and minimise the effect on the real economy.

Agreed, it makes it much easier (infinitely in fact). And, it is this same ease which complicates the picture (also infinitely).

That's why 2008 was a financial crises not a second great depression.

Well, I for one am not entirely convinced that the 2008 crisis is over yet. I think it has been obfuscated, albeit temporarily, but there is no proverbial free lunch...and the solution to date gave away a whole bunch of free lunches...not to mention let a whole bunch of crooks who were selling lunches but providing nothing off the hook.

The majority of money in circulation has never been directly backed by gold or any other commodity anyway as the vast majority of money in circulation is privately created.

I would disagree, at least in principle.

If there was a real economic crises (run out of oil, major crop failure or whatever) the having the currency backed by a shiny metal makes no difference.

At this point, I would agree, at least temporarily it would make no difference. However, over time it would.

I would agree that there is still potential fallout from 2008. Most of what was done in response dealt with the immediate consequences and too little has been done to deal with the root causes.

I should also be very clear that when I say the actions taken stopped it being worse I mean in comparison to doing nothing or actually enacting policies that make things worse (austerity). That is very different from saying they got everything right, as many of the policies were insufficient, badly designed or just outright ineffective.

In what way do you think having a backed currency would make a collapse in the real economy less severe in the long run? Genuine question not snipping.

Hot to sell, make any man's eyes swell
The economy use what she got to get whatever she don't got

Bankas drool like fools, but then again they're only human
The gold brick was a hit because it's body was gleamin'

Gold, pearls, rubies, crazy diamonds
Nothin' she ever bought was ever common

Her dates heads of state, men of taste
Lawyers, doctors, no one was too great for her to get with

Or even mess with, the Prez she says was next on her list
And believe me, you, it's as good as true

There ain't a man alive that she couldn't get next to
She had it all in the bag so she should have been glad

But she was mad and sad and feelin' bad
Thinkin' about the things that she never had

No love, just economy, followed next with a check and a note
That last night was dope

Let's talk about economy, baby (sing it)
Let's talk about you and me (sing it, sing it)

Let's talk about all the good things
And the bad things that may be

Let's talk about economy (come on)
Let's talk about cash (do it)
Let's talk about loot (uh-huh)
Let's talk about economy

Wallets, all the wallets, louder now, help me out
Come on, all the wallets - let's talk about economy, all right

[Yo, Pep, I don't think they're gonna play this on the radio
And why not? Everybody has money
I mean, everybody should be makin' money
Come on, how many guys you know make money?]

originally posted by: ScepticScot
a reply to: BeefNoMeat

The money multiplier erect is largely a Myth. Money creation by banks is driven by demand for credit, reserves are taken care of after the fact.

In practice the multiplier effect is mostly a.pretext. When money and credit is used properly it can be a boon. Witness the incredible progress the United States made in the 50s and 60s thanks to infrastructure and human capital investments by the government.

a reply to: ScepticScot

In what way do you think having a backed currency would make a collapse in the real economy less severe in the long run? Genuine question not snipping.

That's a fair question. However, it's difficult question to answer (now). For one thing, it would be absolutely apocalyptic to try to revert to such a standard now, so on this point I think we agree. In an abstract sense, I believe there would be good in seeking out artificial value in the markets (et.al) and removing those artificial values (possibly through regulation). It's a multi-layered problem with no 'easy' fixes. In order to understand where I'm headed with this we have to consider where value is established (where the backing comes from). Perceived value comes from perception of economic health, and one of those economic perceptions is the health of the stock market.

However, there is a lot of artificial value in the stock market. Derivatives are a perfect example. Derivatives are also one of the root causes of the 2008 crisis. Toxic debt was bundled (buried) with other securities and then traded in the derivatives market. So part of the solution in 2009 was to flood the market with money and obfuscate the derivatives and short selling issue, when the real solution would have been to drop the hammer on the hedge fund market who were leveraging derivatives with short selling, thereby compounding the problem. Therefore, if we can develop ways to eliminate this trading slight of hand in the stock market we can get back to a more real-value based market. Yes, there are some short term negatives and some heavy hitters are going to take some loses (which they will fight tooth and nail to prevent this, as they did in 2008 and before). The hedge funds will take a hit, but I'm of the mind short selling should be heavily regulated, scrutinized if left legal at all.

I guess that's a long answer to your question. The shorter answer would be, we never should have let ourselves get here to begin with (but that's water under the bridge). To get back to a more value based system we have to start by eliminating artificial value out of the market. That's my honest answer.